Assume that capital is perfectly mobile. The foreign and domestic

economies are initially at potential GDP. The domestic economy is small

and the foreign economy is large. Using the AD-AS model analyze the long

run impact on domestic X-M, I, C, Y and P of the following independent

shocks.

a. Let the domestic government cut personal income tax rates but

leave overall government spending unchanged. Assume the exchange rate is

fixed.

b. Foreign government spending G* falls. The exchange rate is

floating.

Please analyze the impact from shocks in a and b by using AD-AS model